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Movie Theater Stocks Take Hit Amid Analyst Downgrade

Wall Street observers highlight a weaker-than-expected second-quarter box office take and continued 3D woes, but at least one analyst sees a buying opportunity as Regal Entertainment trades near its 52-week low.

NEW YORK - Stocks of movie theater operators had a mixed first half of the year, and many started the post-July 4th trading week lower as one analyst on Tuesday downgraded key sector stocks and several others highlighted a weaker-than-expected second-quarter box office take.

Regal Entertainment Group's stock closed down 5 percent at $11.90 after earlier going as low as $11.77 - close to its 52-week low of $11.59. Cinemark Holdings finished 4.4 percent lower at $20.20. But that was still close to its 52-week high of $22.09, which the stock hit in late May. Imax shares, which had hit a 52-week high of $38 last month, closed 8 percent lower at $29.99. Carmike Cinemas shares declined only 0.4 percent at $6.85.

However, at least one Wall Street observer said that exhibition stocks have already declined in recent weeks, providing investors an opportunity to buy into the sector at low prices despite a disappointing gain of 4.4 percent in second-quarter box office revenue.

Janney Montgomery Scott analyst Tony Wible on Tuesday downgraded shares of exhibition giant Regal Entertainment Group from "neutral" to a rare "sell" and shares of Cinemark from "buy" to "neutral."

"Lower estimate revisions create an incrementally negative risk/reward environment," he said in a report. "The downgrades are not a reflection of either company's ability to manage assets, but is ultimately tied to the deterioration in U.S. box office trends that are beyond management's control."

Cinemark gets a better rating from him as Wible highlighted its Latin American presence and argued that the company "should be uniquely able to offset some of these factors through strong international performance and favorable foreign currency movement."

Beyond the broader box office debate, Wible also continued the 3D debate. "Over the past month, we have seen a decline in 3D attendance mix with 40 percent to 45 percent of attendance tied to the format versus around 60 percent on prior films," he pointed out. "We do not believe 3D is a dying fad, but do believe audiences have become more discerning about what films warrant the premium. Furthermore, we believe parents with young children may be starting to question the format's relevance for young children that struggle with glasses."

He also cited "the lingering early VOD threat" as likely to weigh on sector shares.

Barclays Capital analyst Anthony DiClemente in a report on Tuesday also highlighted the second-quarter box office weakness. "Although the second-quarter domestic box office featured a strong line-up of films against an easy year-over-year comparison (second-quarter 2010 industry box office was down 3.1 percent), overall performance in the quarter was underwhelming," he said. "While there were a couple of positive surprises (Fast Five, Bridesmaids), many of the summer's tentpole films disappointed (Pirates 4, Kung Fu Panda2, Super 8, Green Lantern)."

He lowered his financial estimates for Regal and Cinemark. "Waning interest in 3D driven by large supply of 3D films," DiClemente argued.

He and Lazard Capital Markets analyst Barton Crockett highlighted that second-quarter U.S. box office rose 4.4 percent, which the latter said was "well below the 10 percent outlook we held going into the quarter."

Crockett also added a 3D warning. "A likely peak this year in 3D receipts is a caution for the group," he wrote.

Crockett maintained his "neutral" rating on Cinemark, saying that "Latin American growth helps make Cinemark our preferred exhibitor." He also maintained his "neutral" rating on Regal's stock, saying that "we see support for the shares in a 6.7 percent recurring dividend yield."

What is in store for the just-started third quarter? Wible said he expects U.S. box office to decline 2 percent from the year-ago period as "comps intensify and attendance per screen deteriorates."

DiClemente suggested this may be a good time to buy shares of movie theater groups though. "The exhibitor stocks have sold-off over the last several weeks largely due to concerns about declining 3D splits," he argued. "However, we believe that much of this has already been priced in and current levels could be an attractive entry point."

In a bit of a counter point to others on Wall Street, DiClemente maintained his "overweight" rating on Regal shares and his "equal weight" rating on Cinemark.

Meanwhile, Stifel, Nicolaus analyst Drew Crum on Tuesday lowered his second- and third-quarter Imax estimates "given more recent data on some recent releases and some updated thoughts on future releases."

"On Super 8, we had originally estimated that the film would generate $22 million in Imax box office, but [it] has in fact generated $10 million," Crum wrote.

For the third quarter, he cut his Cars 2 Imax box office estimate from $44 million to $24 million "based on opening weekend results in North America." Harry Potter And The Deathly Hallows: Part II will be a "critical" film for the third quarter, he noted. With the previous film bringing Imax a box office take of $43 million, he said that performance benefited from a 2D release, which boosted Imax's result. With the latest film coming out in 3D, Crum lowered his Imax box office forecast on the title from $92 million to $73 million."